Last week we highlighted our gold stocks bull analog chart which showed the
gold stocks correcting at least 20% at this point during both the 2008-2009
and 2000-2001 recoveries. We concluded that gold stocks were likely to continue
to correct in the days and weeks ahead. While that has played out so far, we
should also note that Gold is suddenly looking more vulnerable.
Unless Gold has a big bounce the next two days then its monthly chart will
show a bearish engulfing candle for the month of May. That implies weakness
in June. Key support levels are $1180 and $1140. The bearish reversal in May
takes Gold back below its 40-month moving average at $1252. The 40-month moving
average has been an excellent trend indicator for Gold throughout its history
and it is the last line of defense for bears. They defended it, now bulls will
need to defend $1180 and $1140.
Equally as troubling for bulls, Gold has lost strength in real terms as it
is acting poorly against foreign currencies (FC) and the equity market. Since
Gold/FC touched a 3-year high in February it has undergone a sustained correction.
Meanwhile, Gold/equities has already retraced most of its winter gains. Look
for these ratios to continue lower and test their 400-day moving averages.
Meanwhile the miners have obviously begun a correction. GDX and GDXJ were
already off 16% and 17% respectively at Wednesday's lows. Even though the miners
did not reach their 2014 resistance highs they still reached the second most
overbought point in the past 20 years. GDX's parent index, $GDM's distance
above its 100 and 200-day moving averages was the second greatest in the past
20 years. That leads us to believe that the correction is likely to be greater
than the routine 20%.
The weekly charts of GDX and GDXJ are shown below with the blue lines showing
downside support targets. GDX should find good support around $20 while GDXJ
should find support at or below $30. A move just below $20 equates to a 25%
correction in GDX.
The precious metals sector has begun a sizeable correction and it figures
to continue into June. Gold needs to regain strength soon in real terms or
it could undergo a deeper and longer retracement of its recent rebound than
initially anticipated. We will continue to take first cues from the miners
which should continue to lead the sector in the weeks and months ahead. Those
who have been waiting for a buying opportunity could have their first chance
in the weeks ahead.
